The new Coronavirus Job Retention Scheme will provide UK employers with support for paying staff wages. The scheme involves furloughing employees. How will it work?
The government has now issued official guidance for employers on claiming for wage costs through the scheme and there is separate guidance for employees. Below we answer the key questions and highlight some of the remaining uncertainties.
Summary of the scheme
- The scheme applies to all employees who were on the payroll on 28 February 2020, on any type of contract so long as they were paid under PAYE. It also applies to employees who were made redundant on or after 28 February 2020, who can be re-employed and then furloughed. Employers can furlough employees whose roles are not entirely redundant but who have less work to do than they usually would, so long as they do not do any work during the furlough period.
- HMRC will reimburse 80% of furloughed workers’ usual wage costs, up to a cap of £2,500 (gross) per worker per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer contributions on that wage. There is no obligation to top up to full salary, although employers can elect to do so. There is also no obligation to top up to national minimum wage if the 80% takes an employee below the minimum (unless the employee is doing training).
- Employees cannot do any work for employers whilst they are on furlough. They can do volunteer work, or training if this does not provide services to or for the employer, or generate revenue for the employer
- An employee must be furloughed for a minimum period of 3 weeks. A furloughed employee can then return to work, and put on furlough again later if needed.
When will the scheme be ready?
The government’s intention is to have the scheme up and running by the end of April so that the April payroll can be reimbursed through the scheme. Claims can be backdated to 1 March 2020. Employers do not, however, need to wait until the grant scheme is up and running to put employees on furlough.
Which employers is the scheme open to?
The scheme will be available to all UK employers, including businesses, charities, recruitment agencies and public authorities, of any size and in any sector. To be eligible, employers must have created and started a PAYE payroll scheme on or before 28 February 2020 and have a UK bank account.
How much can employers claim?
HM Revenue & Customs (HMRC) will reimburse 80% of furloughed workers’ usual wage costs, up to a cap of £2,500 (gross) per worker per month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer contributions on that wage.
Fees, commission and bonuses cannot be claimed for.
For salaried employees, you must use the actual salary before tax, as of 28 February.
For employees whose pay varies (for example because they work shifts) you can claim for the higher of either:
- the same month’s earning from the previous year
- average monthly earnings from the 2019-20 year
If an employee with variable pay has been employed for less than a year, you can claim for an average of their monthly earnings since they started work. If the worker only started in February 2020, you should use a pro-rata approach.
Do we have to top up the subsidy?
No. You can top up the subsidy if you wish, but you do not have to do so. For employers that are topping up, a key question is how to maintain a fair differential between furloughed employees and any employees who are still working.
What if the subsidy is less than the minimum wage? Do we have to top it up?
No. Workers are only entitled to the National Minimum Wage/National Living Wage for the hours they are working. You do not need to ensure that they are receiving NMW/NLW rates while on furlough.
The position is different, however, if you are asking workers to complete training – see below.
Is it a grant or a loan?
It will be a grant, not a loan, so it will not need to be repaid. Payments received by a business under the scheme must, however, be included as income in its calculation of taxable profits for Income Tax and Corporation Tax purposes – although businesses can continue to deduct employment costs as normal.
What about pension payments?
You can reclaim the minimum mandatory employer pension contribution on the subsidy. This claim can be made on top of the £2,500 cap.
The current minimum contribution under the auto-enrolment regulations is 3% of an employee’s income above £512 per month (rising to £520 per month from 6 April 2020). Pension contributions over and above this cannot be claimed through the scheme but you will need to maintain them, unless you agree something else with employees.
What about benefits such as health insurance, gym membership etc?
These will need to be maintained, unless you agree something different with furloughed employees.
It does not look as though employers can claim the cost of benefits though the subsidy (except for pension contributions). In any case, many employers will opt to maintain benefits as the simpler option, particularly if they have already paid for the cost of them.
Employers that offer permanent health insurance or death-in-service benefits should check with their scheme provider about what salary would be used in the event of a claim – would it be normal annual salary or pay during furlough?
Will the payment be taxable?
Yes, payments you make to furloughed employees will be subject to PAYE and National Insurance contributions.
How do we put someone in the furlough scheme?
You need the employee to agree to be put on furlough (see further below) and then you will need to designate them as furloughed. The guidance says that, to be eligible for the subsidy, employers should write to their employee confirming that they have been furloughed and keep a record of this communication. They need to be on furlough for at least three weeks.
Does someone need to have been on the payroll on 28 February 2020 to be put on furlough?
Yes, so you cannot use the scheme to furlough all new joiners. Employees hired after 28 February 2020 cannot be furloughed or claimed for in accordance with this scheme. Note that the key date is 28 February, even though 2020 is a leap year and there was a 29 February this year.
Can we only put people in the furlough scheme if redundancy was the alternative?
The government previously indicated that the furlough scheme was an alternative to redundancy, lay-off or unemployment. The guidance for employees refers to furlough as applying when the employer is unable to operate or has no work for the employee to do, but there is no explicit requirement in the latest guidance for employers to show that redundancy was the alternative.
It seems that HMRC may have accepted that putting employees on a furlough scheme which means they are not working is enough to show that they would otherwise have been made redundant. The guidance does state, however, that the scheme is “designed to support employers whose operations have been severely affected by coronavirus”.
Importantly, note that the government has indicated that it will retain the right to retrospectively audit employers, with scope to claw back fraudulent or erroneous claims. Ultimately, it seems that employers may be allowed some discretion, but they should not be abusing the scheme.
Can we rotate employees on furlough?
We think so, yes. Some employers have work for some staff, but not enough work for all. One of the most pressing questions since the scheme was first announced was whether employees could rotate employees on furlough or if they would have to choose some employees to be furloughed while others stayed at work. The employer guidance is unclear on this point, but the employee guidance seems to answer the question, by saying that employees can be placed on furlough more than once.
This suggests that employers can rotate employees on furlough, so long as each employee spends a minimum of three weeks on furlough. This would mean, for example, that an employer can select an initial group of employees for furlough while a second group remain at work. The first group could then come back to work while the second group take their turn on furlough.
Can employees do the odd bit of work for us while furloughed?
Definitely not. Employees cannot undertake work for or on behalf of an employer that has furloughed them. The guidance says that this includes “providing services or generating revenue”. If they do any work for you then you may have to repay the grant.
We recommend drawing this to the attention of any furloughed employee who could otherwise be doing some work from home. It is important that they don’t do anything that could jeopardise your ability to claim the grant.
Directors and owner-managers can be furloughed if on PAYE and will still be allowed to do statutory duties in these roles – this will not count as work which disqualifies them from the grant.
Can we ask employees to do training while furloughed?
Yes. A furloughed employee can do training if this does not involve providing services or generating revenue. The guidance points out that if workers are required to, for example, complete online training courses while they are furloughed, they must be paid at least the National Living Wage/National Minimum Wage for the time spent training, even if this is more than the subsidy.
Can someone in the furlough scheme do work for other employers?
Possibly. The guidance is clear that agency workers will only be eligible for the scheme if they are not working. The wording of the guidance suggests that working elsewhere may not be an absolute barrier to other types of employee being furloughed, but it is not entirely clear.
You should be able to impose restrictions on employees working elsewhere, even if this is allowed under the scheme, but you should think carefully about whether you want to do so. You will obviously want to stop furloughed employees from working for a competitor, and there will be no need to say this explicitly because the employee’s underlying contract of employment will stay in place throughout the furlough. You might want to allow furloughed employees to take on extra work in, for example, the health and social care sector or essential services.
Can furloughed employees do volunteer work?
Yes, this is allowed.
Do employees have to agree to being furloughed?
Yes – generally they do, but this does not necessarily need to entail a protracted procedure. In our view, most employees will be willing to accept furlough on basis that the other options are worse and to ensure they still have a job to return to when the crisis is over.
Can employees put themselves on furlough?
No. You, as the employer, need to designate them as furloughed.
How long can we keep workers on furlough?
The minimum length of furloughing is three weeks. An employee can however be furloughed multiple times, subject to the minimum time period of three weeks, as often as the employer and employee agree.
The scheme will be open for an initial period of three months (1 March to 31 May 2020) but it might be extended.
Employers are likely to want to reserve the right to call employees back from furlough if trading conditions improve.
When can we start claiming?
The subsidy applies from when an employee is placed on furlough. The scope for backdating is unclear.
The backdating to 1 March 2020 seems to be designed to cover those who have already been laid off or made redundant as a result of coronavirus, so if employers re-employ people who were made redundant after 1 March they can furlough those employees and claim the grant.
What if we’ve already made redundancies?
If you have made employees redundant since 28 February, it is possible to give those former employees the option of being rehired and then put straight on the scheme.
Can we make some people redundant and furlough others?
Yes. The guidance clearly says that you do not need to place all your employees on furlough.
How should we select which employees should be furloughed?
Workers who cannot work from home and who currently have no work to do will be obvious candidates for furloughing. Otherwise, employers may need to consider a process of calling for volunteers, pooling and selection – as with a redundancy process. There is a risk of claims (including discrimination claims) if the process is not handled correctly.
Can we do a partial furlough to put somebody on reduced hours?
No. An individual cannot work for you at all if they are furloughed.
If you have some work for an individual, but not enough, you can still have a discussion with them about going down to a reduced working week. They will need to agree to this, except in the unlikely event you have reserved the right to put them on reduced pay for reduced work, and they will not be on the furlough scheme.
What is the process for claiming the payment?
You will need to submit information to HMRC about workers who have been furloughed and their earnings, via a new HMRC online portal. The portal will hopefully be open in April. If you need short-term cash flow support in the meantime, the government has said you may be eligible for a Coronavirus Business Interruption Loan.
What about casual workers and workers on zero-hours contracts?
The scheme will cover workers on the PAYE system, including any casual or zero-hours worker who are paid in that way. For workers whose pay varies, you can claim for the higher of either:
- the same month’s earning from the previous year
- average monthly earnings from the 2019-20 year
If the worker has been employed for less than a year, you can claim for an average of their monthly earnings since they started work. If the worker only started in February 2020, you should use a pro-rata approach.
What about agency workers?
Agency workers on PAYE can be furloughed by the agency, so long as they are not doing any work.
Can workers be in the furlough scheme if they are off sick?
The guidance says that “employees on sick leave or self-isolating should get Statutory Sick Pay but can be furloughed after this”. This suggests that you cannot put an employee on furlough until they have come off sick leave, which is surprising.
The guidance does not deal explicitly with employees who become sick while on furlough, although it does say that employees will retain their entitlements to SSP. Since SSP is likely to be lower than furlough pay, they will however have no incentive to declare themselves sick.
Employers will need to decide what to do about company sick pay. It may be best to agree that company sick pay is suspended.
What about employees on maternity or other family leave?
The guidance says that employers can claim for enhanced maternity pay through the furlough scheme. This suggests that employees can furlough employees on maternity leave. They will be able to reclaim SMP in the normal way and subject to the normal rules and can then claim for any enhanced contractual pay on top through the furlough scheme.
Currently, employers can reclaim 92% of SMP (or 103% of they qualify for Small Employers’ Relief). It is unclear if employers can claim the 8% balance of SMP through the scheme, along with enhanced contractual pay.
The same principles apply to other types of family leave (according to the employee guidance).
Will workers continue to accrue holiday allowance while they are furloughed?
Yes, because they remain employed. You could agree that no contractual holiday (beyond the statutory minimum of 5.6 weeks per year) will accrue during furlough, but employees will retain their right to accrue annual leave under the Working Time Regulations.
Can people take their holiday allowance while furloughed?
This is not entirely clear. You could refuse requests for holiday during furlough if you want to do so, but you might prefer employees to use up their holiday allowance rather than storing it up and we currently expect this to be possible under the scheme although we cannot say for certain. To require employees to take holidays (if this is going to be allowed), you would need to give twice as much notice as the length of the holiday you want them to take (e.g. ten days’ notice for five days’ holiday) unless the contract says something else.
What should we pay staff who take holiday during furlough?
This is a complicated question on which we suggest you take advice. We expect that you will be able to claim for holiday pay through the grant, in the same way as wages or salary, although the guidance is not as clear as it should be on this point.
Will employees continue to accrue continuous service during furlough?
Yes, the underlying relationship will continue if a worker is furloughed, so their period of continuous employment will continue to accrue throughout and will be recognised in full once the furlough comes to an end.
What happens at the end of the furlough?
The idea is that employees will be able to come back to work. The scheme is designed so that employers don’t need to make redundancies and then recruit a new workforce once the crisis is over – their existing workforce will be ready and waiting in the wings to resume work.
However, if trading conditions have not improved sufficiently for you to take all the furloughed employees back when the scheme ends then you will be able to make them redundant, subject to the usual rules on redundancy.
This is significant because other European countries that have similar schemes in place are imposing restrictions on employers making redundancies. No such conditions are being imposed in the UK, however.
Are foreign nationals with visas eligible for the furlough scheme?
We have seen nothing to suggest otherwise. We believe it will cover all workers so long as they are UK workers on UK contracts, working in the UK and paying UK PAYE. There are potential sponsor compliance issues to consider for Tier 2 workers, and while foreign nationals with limited leave are in most cases not entitled to receive public funds, accessing funds through the furlough scheme is not currently prohibited.